On January 28, 2019, FINRA released its Regulatory Notice 19-04 announcing its 529 plan self-reporting initiative. This initiative is part of FINRA efforts to have broker-dealers promptly remedy potential supervisory and suitability violations related to recommendations of share classes for 529 plans. Continue reading “Alert: FINRA’s 529 Plan Share Class Initiative to Self-Report”
Author: Matthew Silver
Posts by Matthew Silver:
If adopted, proposed new FINRA Rule 3290 will be significant for broker-dealers who allow their associated persons to engage in outside business activities (in particular in securities related fields – such as serving with/as a third-party investment adviser) and broker-dealer staff who engage in such activities. In general, the changes may make the lives of both such groups a bit easier.
FINRA Rule 3290 would be a replacement for both current FINRA Rule 3270 (Outside Business Activities (OBA) of Registered Persons) and current FINRA Rule 3280 (Private Securities Transactions of an Associated Person) for its member broker-dealers. As explained in Regulatory Notice 18-08, compliance with proposed FINRA Rule 3290 would involve only modest and mostly clarifying changes for most traditional “3270” activities. The impact on what are now “3280” activities could be more pronounced.
Probably of the greatest interest for many broker-dealers: proposed Rule 3290 would ease current requirements with respect to the investment advisory activities of their registered persons. Under Rule 3280, FINRA members must supervise and record on the members’ books and records the transactions resulting from a variety of outside “IA” activities of their associated persons. Under proposed Rule 3290, any IA activity conducted on behalf of a dually registered “BD/IA” or for an IA affiliate of a member would be excluded from the rule. Any IA activity conducted for a third-party, non-affiliated IA would constitute an “investment-related” activity under the rule – as a result, it would require that the registered person provide prior written notice of such activity, and the FINRA member would then be required to conduct a risk assessment and based on its assessment, to: (a) approve the registered person’s participation, (b) approve it subject to conditions or limitations, or (c) disapprove it. However, the proposed rule would not impose a general supervisory obligation over the IA activities and would not require the FINRA member to record on its books and records transactions resulting from such IA activities.
Under the proposed rule, if an activity is not “investment related,” the broker-dealer would effectively have no material obligations (other than receiving notice of the activities and recording the activity on the associated person’s Form U-4). If the activity is “investment-related,” then the broker-dealer would be required to perform a risk assessment. The proposed rule defines “investment-related” as “pertaining to securities, commodities, banking, insurance, or real estate (including, but not limited to, acting as or being associated with a broker-dealer, issuer, investment company, investment adviser, futures sponsor, bank, or savings association).”
The proposed rule would impose a supervisory obligation in two key situations:
-First, if a broker-dealer decides to impose its own conditions or limitations on a registered person’s participation in an investment-related activity, the broker-dealer would then be required to “reasonably” supervise the registered person’s compliance with those specific conditions or limitations. Actual supervision of the underlying activities would not be required.
-Second, to the extent that a broker-dealer approves a registered person’s participation in a proposed investment-related activity and such activity would require, “if not for the person’s association with a member, registration as a broker or dealer under the Exchange Act and the person is not so registered,” the activity would be deemed to be part of the broker-dealer’s own business. So, if an associated person could only legally engage in an “OBA” because the individual is associated with a FINRA member, the FINRA member approving that activity must treat the activity as its own in all respects. Accordingly, all applicable securities laws and regulations and FINRA rules, including supervision and recordkeeping, would apply to the FINRA member with respect to the approved activity.
Under this second situation, if the registered person is associated with more than one FINRA member, the individual FINRA members would be permitted to develop a formal allocation arrangement whereby at least one member agrees in writing with specificity to comply with all applicable securities laws and regulations and FINRA rules (including supervision and recordkeeping obligations) regarding the proposed activity.
As provided in summary as part of Regulatory Notice 18-08:
|Selling Private Placements Away from Member||Subject to the proposed rule, potentially to the fullest extent – prior notice by the registered person and risk assessment by the member. If the member disapproves the activity, it has no further obligation. If the member approves the activity, the activity becomes part of the member’s business and must be supervised and recorded as such.|
|Activities at Third-Party IA||Subject to the proposed rule, but in an intermediate manner – prior notice by the registered person and risk assessment by the member because it is investment related and not excluded from the proposed rule, but the member is not required to supervise or keep records of the IA activities.|
|Non-Investment Related Work (e.g., car service, seasonal retail)||Subject to the proposed rule, but in a limited manner – a registered person must provide prior notice to the member, but the member is not required to perform a risk assessment of or supervise the activity.|
|Activities at Affiliates (e.g., IA, Insurance and Banking Affiliates)||Generally excluded from the proposed rule – the proposed rule excludes activities at affiliates, whether or not investment related, unless those activities would require registration as a broker or dealer if not for the person’s association with a member.|
|Personal Investments (e.g., Buying Away)||Excluded from the proposed rule, but potentially subject to other rules (e.g., FINRA Rule 3210) or firm-imposed notice requirements.|
The SEC recently issued three no-action letters designed to provide market participants with greater certainty regarding their U.S. regulated activities as they engage in efforts to comply with the EU’s Markets in Financial Instruments Directive (MiFID II).
In a recent client alert, I provided a summary of all three no-action letters and explain that as a result of these no-action letters, existing soft-dollar and commission-sharing arrangements may continue, subject to certain new restrictions. Click here to read the client alert.
As background, MiFID II will require, for impacted EU parties, that research be priced separately from execution, starting on January 3, 2018. This represents a significant change from the current practice, whereby research is generally supplied as part of a bundle of services, with no explicit charge.
Absent new U.S. regulations or other relief, this change had the potential to cause a significant number of problems for U.S. advisers, funds and clients dealing with EU parties.
The SEC’s Rule 206(4)-5 under the Investment Advisers Act of 1940 (Advisers Act), aka the Pay-to-Play Rule, was partially delayed until recently, when FINRA adopted a complementary Rule. Broker-dealers that engage in distribution or solicitation activities with a government entity on behalf of any investment adviser need to pay close attention to the rule changes. I have outlined the rules, penalties and new FINRA rule below.
Continue reading “Political Contribution Limitations Now Also Mandatory for Broker-Dealers”